Yasir Hameed

During a recent briefing to the National Assembly Standing Committee on Finance, Federal Finance Minister Muhammad Aurangzeb assured that the government’s commitment to the International Monetary Fund (IMF) program remains strong, with no disruptions in the ongoing negotiations. He emphasized that the government is determined to meet all time-bound conditions and structural reforms. However, despite the government’s resolve, there are significant concerns regarding delays in the implementation of key reforms under the current $7 billion, 37-month Extended Fund Facility (EFF) agreement.

Aurangzeb pointed out four main sources of concern:

1. Delays in Foreign Assistance: The EFF program requires financial assistance from three friendly countries (Saudi Arabia, China, and the UAE) as a prerequisite for releasing IMF tranches. Data from the Economic Affairs Division, as of November 2024, revealed that the $9 billion budgeted from Saudi Arabia and China had not been received by the end of October. These funds were intended as time deposits, but they are still pending. The government had hoped to offset this delay by cutting current expenditures, but no concrete steps have been taken to adjust the budget, raising concerns about the reliance on these inflows.
2. Taxation Reforms on Traders and Wholesalers: A key reform under the IMF agreement was the taxation of traders and wholesalers previously outside the income tax system. However, the implementation has been watered down significantly. The Federal Board of Revenue (FBR) acknowledged that it had misunderstood the ground realities and adjusted tax rates, particularly for medium-sized traders. While the government aims to register more retailers and improve tax compliance, political opposition to certain aspects, such as the taxation of wealthy landlords, remains a stumbling block.
3. Failure in Privatization of PIA: One of the government’s key commitments under the IMF agreement was the privatization of Pakistan International Airlines (PIA). However, this has not materialized, with only one bidder offering a price far below the required minimum. This failure raises doubts about the government’s ability to privatize other state-owned entities (SOEs). Although there have been efforts to reorganize poorly performing SOEs, these have been limited to cosmetic changes, such as replacing board directors, without significant improvements in financial performance.
4. Power Sector Reforms: The power sector reforms agreed upon with the IMF have once again placed the burden of inefficiencies on the general public through higher tariffs to achieve full cost recovery. The government continues to rely heavily on annual subsidies exceeding half a trillion rupees for tariff equalization. This approach, which has been part of previous IMF programs, has not led to sustainable improvements in the power sector.

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Aurangzeb also pointed out other areas where reforms have not been fully implemented, such as maintaining a positive real effective exchange rate, updating export proceeds repatriation policies, pension reforms, and addressing ongoing governance issues.

The finance minister concluded by stressing that the success of the IMF agreement will depend on the government’s ability to follow through on these reforms, rather than just reiterating promises. The real test will be in the effective implementation of these policies.